Travers Company is contemplating the acceptance of a special order has the following unit cost behavior, based on 10,000 units (the total capacity of their factory). Travers Company is presently manufacturing 7000 units in their factory. Direct Materials $7 Direct Labor $8 Variable Overhead $7 Fixed Overhead $6 Poppins Company wants to purchase 2,000 units at a special unit price of $35. The normal price per unit is $40. In addition, a special stamping machine will have to be purchased for $4,808 in order to stamp the company’s logo on the product. What is the amount of the incremental income (loss) from accepting the order? (your answer should be the total incremental profit or loss for ALL 2000 units, not just one unit)

Effect on income= $21,192 increase

Explanation:

Because it is a special offer and there is unused capacity, we will take into consideration only the incremental fixed costs.

Direct Materials $7

Direct Labor $8

Variable Overhead $7

Incremental fixed costs= $4,808

To calculate the effect on income, we need to use the following formula:

Effect on income= total contribution margin - incremental fixed costs

Effect on income= 2,000*(35 - 7 - 8 - 7) - 4,808

Effect on income= $21,192 increase

Incremental income = $21,192

Explanation:

A special order is a request from a customer at a proposed price lower than the standard price charged by the supplier.

The relevant cost for a decision to accept or reject a special order are : 

I .Incremental revenue from the special order  

2. incremental variable cost of the special order

3. Other specific cost associated with the other

Note that whether or not the special order is accepted, Popins Company  would still incur the fixed overheads either way. Therefore , they are not relevant for the decision

Variable cost cost= Direct material + Direct labor + Variable overhead

                              = 7 +8+7= $22

Sales revenue from the special order                                             $

($35 × 2,000)                                                                               70,000 

Variable cost of the special order (22× 2,000)                         (44,000)

Cost of special stamping  machine                                           (4,808)

Incremental income                                                                     21,192                                                              

Incremental Income     =  $21,192

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